Can the Reit IPO market rev up to help investors build retirement savings?

THE drought in the initial public offering (IPO) of real estate investment trusts (Reits) on the Singapore Exchange (SGX) through the later part of 2020 and into much of 2021 ended with the successful listings of Daiwa House Logistics Trust (DHLT) and Digital Core Reit (DC Reit) towards the end of 2021. The former owns logistics assets in Japan, while the latter owns data centres in the United States (US) and Canada.

DHLT and DC Reit follow many newer Reits that are listed here, by focusing on overseas assets. Compared with their IPO prices, DHLT and DC Reit traded flat and up 32 per cent respectively as at end-2021.

The trading performance of DC Reit contrasts with the fortunes of overseas-centric Reits that made their trading debuts in 2019 or 2020 such as United Kingdom-focused Elite Commercial Reit, US-focused United Hampshire US Reit and US-focused Prime US Reit - all of which traded below their IPO prices as at end-2021.

Perhaps the lure of data centres helped Singapore investors overcome scepticism about overseas-centric trusts. Crucially, the success of DC Reit and DHLT shows that the problems faced by Eagle Hospitality Trust (EHT), a US-focused hospitality stapled group, will not deter investors from overseas-centric Reits. Trading in securities of EHT, which listed in May 2019, was suspended less than a year later after one of EHT's units defaulted on a loan.

Can the Reit IPO market rev up in 2022 and will there be a steady stream of new Reit IPOs over the next few years? Perhaps new Reit IPOs will continue to be dominated by overseas-centric Reits. Possibly the outlook for new Reit IPOs may not be rosy.

The growth of the Reit sector here has created a strong ecosystem of real estate executives, bankers, lawyers, accountants, tax advisers, valuers, fund managers, regulators and equity analysts who are familiar with Reits.

However, the size and track record of the incumbent market leaders can make it challenging for a new Reit with a portfolio of S$1 billion to S$2 billion or for a trust with a sponsor that is new to the market, to gain traction with investors.

Property groups are probably well aware that real estate fund management can be very lucrative.

Last year, ESR Cayman entered into an agreement to buy all of ARA Asset Management, which is active in real estate fund management, for several times its end-June 2021 book value.

CapitaLand Investment (CLI), which is active in real estate fund management, traded at a premium of 11 per cent to its net asset value based on its end-2021 share price.

ESR, CLI and groups such as Mapletree Investments and Keppel Capital are keen to grow their real estate fund management business.

This can be done through listed Reits or private real estate funds. Indeed, a major threat to new Reits listing on the SGX comes from the growth of private funds.

For year-to-date (YTD) September 2021, CLI's funds under management was S$84 billion, split 66 per cent and 34 per cent between listed funds and private funds, respectively. CLI is accelerating efforts to grow its private funds - it had 7 new private funds incepted in YTD September 2021, with more than S$1.4 billion raised from external parties.

Mapletree had a record year of private fund raising in 2021, successfully closing 3 funds. Assets under management of private funds rose by US$6.1 billion to US$13.8 billion.

In December 2021, the group announced the successful closing of Mapletree US Logistics Private Trust, which owns 155 logistics properties, at US$1.4 billion in total fund equity.

Sure, some private funds and listed Reits may pursue different types of property investment opportunities. Still, some private funds do compete for the same high quality income-producing stabilised assets that Reits are interested in.

If property groups can grow their fund management business and raise large sums of equity via private funds, pursuing public listings may prove less attractive. Preparing for an IPO can take a year and incur substantial costs. Subsequently, a listed trust needs to deal with various compliance issues, run an active investor relations programme and vie for coverage from equity analysts.

Typically, private funds raise monies from institutions and wealthy individuals. Might the growth of private funds deprive individual investors of the chance to own a tiny slice of investment grade real estate via a proven product that is well regulated as is the case with Reits?

In her last speech as chief executive officer and executive director of Temasek Holdings on Sep 30, 2021, Ho Ching highlighted the need for businesses and investors to open new opportunities for retail investors.

Ho noted that one aspect of preparing for retirement is saving and investing, which should begin as soon as one enters the workforce. She stressed the importance of creating suitable products for young investors, first-time investors, as well as for retirees and small investors, citing efforts such as the development of Reits and Temasek's private equity bonds for retail investors.

With rising life expectancy, saving and investing to fund retirement needs is essential. Leaving monies in the Central Provident Fund accounts to grow and provide for monthly payments for life is one avenue.

Such payments can be supplemented by returns from investing in Reits with good track records.

The market need not wait for overseas portfolios to find their way here. Plenty of investment grade real estate in Singapore is held outside of Reits.

Think of Mercatus Co-operative, which supports the social objectives of NTUC Enterprise. Mercatus owns and manages shopping malls Jurong Point, AMK Hub and Swing By @ Thomson Plaza, and co-owns NEX. Mercatus also owns strata-titled assets within malls and HDB sites, and Grade A office building One Marina Boulevard.

Listed groups such as Singapore Land Group and City Developments and unlisted entities such as Pontiac Land and Far East Organization own high quality portfolios of commercial assets here.

While property owners are free to choose how to hold their properties, they should actively consider listing their portfolios on the SGX via Reits.

Launching high quality Reits adds to the choice of instruments available for investors to build their retirement nest eggs.

May more property groups step up efforts to contribute to helping people save and invest for their golden years.